Tag Archives: excise

The Hot Debate Embroiling New York’s Potency Tax

By Abraham Finberg, Rachel Wright, Simon Menkes
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On March 31, 2021, New York legalized adult-use cannabis with the passage of the Marijuana Regulation & Taxation Act (MRTA). Perhaps the most controversial portion of the Act was Section 493(1)-(3), which established taxes on the potency of cannabis products sold by distributors to retailers. Many cannabis advocates condemn this tariff, arguing that it increases the effective tax rate to such a high level that legal cannabis businesses can no longer compete against the illegal operations. A movement to repeal this tax and substitute a flat tax of 20% is gaining momentum.

Potency Tax Rates & Official Projected Total Tax Percentage

The three potency taxes are:

  1. Edibles (food & beverages): $0.03 per mg of THC
  2. Concentrates (vapes & resins): $0.008 per mg of THC
  3. Flower (loose flower or pre-rolls): $0.005 per mg of THC

The THC tax accrues when cannabis is sold from a distributor to a retailer and is paid to the State by the distributor. If the distributor is also a licensed retailer, such as a microbusiness, the tax accrues at the time of the retail sale.

Along with the state excise tax of 9% and the local excise tax of 4%, the New York Office of Cannabis Management has projected a total tax burden of 20% on an average cannabis purchase.

Potentially Higher Total Tax Percentage

Critics of the potency tax say that it drives the total tax rate much higher than official estimates. In a recent study by the Cannabis Service Team of New York law firm Barclay Damon LLP, tax attorney Jason Klimek (Klimek is also chair of the Tax Committee for the New York State Bar Association’s Cannabis Law Section) provided an analysis showing an effective total tax percentage of 31%-41% on a typical cannabis purchase.

Potency Tax Likely to Result in Higher Tax Rates Down the Line

Rachel Wright will be discussing taxes and more on October 17 at the CQC in New Jersey. Click here to learn more. In addition to possibly burdening legal cannabis businesses with higher taxes, a major problem with a potency tax is that it is product-based, not price-based. This means that, if the retail price of a cannabis product is forced down by market conditions, the potency tax remains the same and effectively becomes a higher percentage of the sales price than it was before.

Because legal cannabis businesses are competing with illegal businesses which pay no taxes, it is likely that legal prices will be forced downward in order for those businesses to compete. This is what has taken place in California, as well as in other states with a strong illicit market. It is much harder for legitimate cannabis operators to remain competitive if they’re saddled with a potency tax. Critics of the potency tax point out that, of the 38 states in which cannabis is legal, only Connecticut has a potency tax.

Increased Costs of Compliance and Other Issues

The potency tax requires producers to pay significant lab expenses for testing of products. Plus, the tax burdens small cannabis producers with higher record-keeping and personnel costs just to manage the process.

Another concern is that today’s testing equipment is not accurate enough to provide a precise measure of THC and thus a precise tax calculation. One recent report by a New York cannabis law firm showed how current testing could result in a variance in taxation of 35% as well as in a retail user consuming 35% more THC than expected:

A lab may have a Measure of Uncertainty (MU) of 3% with a confidence interval of 95%, meaning that there is a 95% chance the true value [of THC] will be within ± 3% of the stated value. Under these hypothetical facts, a farmer that produces 1,000 pounds of cannabis that tests at 20% total THC has a product that may actually range from 17% to 23%. In terms of taxes owed, the difference would be a range of $385,560 to $521,640. Presumably, the farmer would be taxed at whatever percentage is reported on the label, but would be able to choose the percentage on the label, so long as it fell within the MU… This results in at least two  problems. The first problem is that the government may be shortchanged in its tax collection. Second, there is a public health concern resulting from underreporting… if a farmer is incentivized to report the lower percentage, that could result in a consumer consuming approximately 35% more THC than expected.

State Legislators Take Action

On March 6, 2023, Assembly Majority Leader Crystal Peoples-Stokes (D) and state Senator Jeremy Cooney (D) announced Senate Bill S4831 which would replace the potency tax with an increase in the state excise tax, from 9% to 16%. Combined with the local excise tax of 4%, New York would then have a total “flat tax” of 20%.

Cooney commented, “Replacing the potency tax with an increase in the excise tax will allow licensed operators, including social equity operators, to sell competitively-priced products and be less susceptible to undercutting by illicit market prices without sacrificing revenues.” The bill is currently in the Senate Budget and Revenue Committee.

New York’s potency tax has come to be seen by many as a burden to adult-use cannabis companies. Many believe it results in increased taxation and costs of compliance and leaves the nascent legal adult-use cannabis industry in a less competitive position vis-a-vis those companies that operate illicitly. In addition, the variability of the laboratory measurements used in the calculation of the potency tax opens the door to confusion regarding the correct amount of tax owed to the state and could lead to consumers absorbing significantly higher doses of THC than expected.

Businesses that are in favor of substituting an increased rate of excise tax for the potency tax should contact their state legislative representatives and urge support for Senate Bill S4831.

New Jersey’s Careful Approach to Cannabis: Part Two

By Abraham Finberg, Simon Menkes, Rachel Wright
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Click here to read Part One where we examined the state of the market, licensing, approvals and sales. Part Two delves into all things taxes.

A “Raft” of Taxes

Like New York, New Jersey cannabis companies will be dealing with a raft of taxes:

Federal Section 280E: Will It Apply in New Jersey? Well … Sometimes

Section 280E disallows deductions on federal returns for expenditures connected with the illegal sale of drugs, requiring retail cannabis businesses to add back such significant expenses as rent and wages for sales staff.

Much like New York, cannabis companies in New Jersey can expect a lot of taxes

Unlike New York, New Jersey’s recent cannabis legislation did not state that cannabis businesses were exempt from 280E. However, the state’s individual tax laws do not conform to the internal revenue code, and accountants are inferring that 280E won’t apply to sole proprietorships. Conversely, the state’s corporations must start their tax calculations using Federal taxable income, meaning 280E would apply.

Sales Tax

Retail sales of adult use cannabis are subject to a 7% sales tax. Beginning July 1, 2022, medical cannabis sales are exempt from sales tax.

Purchases by cultivators of farming equipment and related property, such as plants, fertilizer and drip irrigation, are exempt from sales tax. Purchases by all cannabis businesses of materials used to contain, protect, wrap and deliver adult use cannabis are exempt from sales tax.

Excise Tax

The CRC has been empowered to collect a “Social Equity Excise Fee”, to be adjusted annually. The fee is currently $1.10 per ounce, but the CRC is able, but not mandated, to amend the fees to between $10 and $60 an ounce after nine months of adult use sales. At least 70 percent of all cannabis tax revenue is earmarked for investing into impact zones.

The fee is imposed on any sale or transfer of cannabis from a cultivator (or alternative treatment center that also cultivates) to any other cannabis business. The fee is not imposed on transfers from one cultivator to another, or from a cultivator to an alternative treatment center. The facility that purchases the cannabis is responsible for collecting the fee and remitting it to the NJ Division of Taxation.

Local Cannabis Transfer and User Taxes

Each municipality is authorized to impose a Local Cannabis Transfer Tax on sales from one cannabis establishment to another (including from one cultivator to another), and on the sale of cannabis to retail consumers. The allowed rate is capped at 2% of receipts, with the exception of cannabis wholesaler sales, which are capped at 1%.

Atlantic City, which considers itself friendly toward cannabis, passed an ordinance in September 2021 authorizing the collection of a 2% tax on retail adult use cannabis sales and a 1% tax on wholesale sales. Many cities with alternative treatment centers already have a 2% tax on medical cannabis. It is assumed they’ll be enacting the 2% transfer tax on adult use sales if approved to operate.

Other Unique Points About New Jersey Cannabis

  1. Adult use sales are limited: adults may possess up to one ounce total of cannabis products and can only purchase one ounce at a time.
  2. New Jersey is the only state that has legalized cannabis, but kept it illegal for a cannabis consumer to grow their own weed. Growing even one cannabis plant can land the offender in prison for up to five years and incur a $25,000 fine.
  3. About 400 municipalities have opted not to have retail cannabis shops; 98 have said yes. The new law has caused battles between mayors and their city councils, including the city of Paramus. 60% of Paramus residents voted in favor of adult use sales, and the mayor has stressed the benefit of the 2% transfer tax. Paramus city council unanimously rejected adult use cannabis, however. Some council members are against any sales, while others want to wait and see how other towns fare. Says Council Member Maria Elena Bellinger, “Ultimately … I feel that getting more data will only help us come to the right solution.”

Time Will Tell

New Jersey believes its careful approach will create the best adult use cannabis environment for its citizens. Only time will tell if the Garden State ends up avoiding some or all of the problems faced by states like California and New York.

Connecticut Legalizes Cannabis

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Update: Governor Ned Lamont has signed S.B. 1201 into law, officially legalizing cannabis in the state of Connecticut

On June 16, 2021, the Connecticut House of Representatives voted to pass their version of S.B. 1201, a bill that legalizes adult use cannabis. Following the House’s approval of the changes, the bill made its way back to the Senate on June 17, where they approved all changes. It now heads to the Governor’s desk, where Gov. Ned Lamont is expected to sign it into law.

Connecticut Governor Ned Lamont

With Gov. Lamont’s signature, Connecticut will become the 19th state in the country to legalize adult use cannabis. The bill is slated to go into effect on July 1, just a couple of weeks away.

Come July 1, adults in Connecticut can legally possess up to 1.5 ounces of cannabis in public and up to five ounces at their home. The bill allows for adults to grow at home, just not until 2023 unless you are an existing patient registered in the medical program.

According to the Marijuana Policy Project (MPP), the bill will expunge cannabis records for low-level crimes and puts “the bulk of excise tax revenues into a Social Equity and Innovation Fund, which will be used to promote a diverse cannabis industry and reinvest in hard-hit communities.” Half of the cannabis business licenses issued will go to social equity applicants that can receive funding, workforce training and other types of assistance from the program.

Connecticut state flag

DeVaughn Ward, senior legislative counsel at MPP, says the bill includes provisions to repair harm done by the prohibition of cannabis. “The Connecticut Legislature’s commitment to legalizing cannabis through a justice-centered approach is commendable,” says Ward. “For decades, cannabis prohibition and criminalization has harmed some of the state’s most vulnerable communities. This bill not only ends this failed and unjust policy, but it also includes measures that will work to repair the harm that it has caused. This state will be a model for others to follow.”

The bill includes strong protections for employees, tenants and students by limiting discriminatory actions based on positive drug tests. It also dedicates 25% of tax revenue from cannabis to go toward mental health and substance use treatment.

Interestingly, the bill has a THC cap in it. Cannabis flower sold at dispensaries is capped at 30% THC content and concentrates (except for vape carts) are capped at 60% THC. To read more about the nuances of the legislation, the MPP has a helpful summary of the bill you can find here.

Bipartisan Cannabis Reform Effort Unveiled in Congress

By Aaron G. Biros
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According to National Cannabis Industry Association (NCIA) executive director Aaron Smith, seven measures were introduced today at the Capitol, covering a variety of issues that, if signed into law, would ease many of the legal implications on the federal level affecting cannabis businesses in legal states currently.

In a very important development, Rep. Carlos Curbelo (R-FL), a member of the House Ways and Means Committee, joined Rep. Earl Blumenauer as a lead sponsor of the 280E tax reform bill. According to an NCIA press release, that bill is The Small Business Tax Equity Act of 2017 and was introduced in the Senate by Sen. Ron Wyden (D-OR), Sen. Rand Paul (R-KY) and Sen. Michael Bennet (D-CO).

Aaron Smith, executive director of NCIA

That bill gives cannabis businesses in legal states the opportunity to take business deductions like any other legal business. Right now cannabis businesses cannot deduct any expenses related to sales, given its Schedule I status. “Cannabis businesses aren’t asking for tax breaks or special treatment,” says Smith. “They are just asking to be taxed like any other legitimate business.”

Rep. Jared Polis (D-CO) introduced the Regulate Marijuana Like Alcohol Act in the House, which would put cannabis in the section of code that regulates intoxicating liquors, essentially giving the ATF oversight authority. “The flurry of bills on the Hill today are a reflection of the growing support for cannabis policy reform nationally,” says Smith. “State-legal cannabis businesses have added tens of thousands of jobs, supplanted criminal markets, and generated tens of millions in new tax revenue. States are clearly realizing the benefits of regulating marijuana and we are glad to see a growing number of federal policy makers are taking notice.”

Rep. Earl Blumenauer (D-OR), Photo: Michael Campbell, Flickr

Sen. Wyden and Rep. Blumenauer introduced The Responsibly Addressing the Marijuana Policy Gap (RAMP) Act, which addresses banking and tax fairness for businesses, civil forfeiture, and drug testing for federal employees. Both Blumenauer and Wyden represent Oregonians, who could benefit tremendously if it becomes legislation. Rep. Blumenauer also introduced The Marijuana Tax Revenue Act, which would put a federal excise tax of initially 10% on cannabis sales, then rising to 25% after five years, according to the NCIA press release.